Much of the discourse on income inequality between ordinary workers and top executives concentrates on a ratio of chief executive officer (CEO) compensation to average employee compensation. The business strategy, organizational structure, and size of a firm can influence the numerator and denominator of this ratio, leading to misinterpretations of a firm’s level of income inequality.

Absent from the income inequality debate is the link between compensation and level of responsibility. Generally, managers earn more than their direct subordinates, and promotions with an increase in responsibility come with a corresponding increase in compensation. The firm’s underlying compensation system dictates the … Read more

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